Kraft profit up, but forecast for '03 reduced

Stock rating cut by analysts likely

July 17, 2003|By Delroy Alexander, Tribune staff reporter.

Even as Kraft Foods Inc. prepares to revamp recipes and cut portions to make its products healthier, the company was unable to satisfy Wall Street's appetite Wednesday when it failed to meet expectations for the second quarter and cut its earnings forecast for the full year.

Although Kraft saw profits rise 5.3 percent to $949 million in the quarter, increasing earnings-per-share by 3 cents to 55 cents per share, the company announced that it was cutting its own estimate for the year by 10 cents.

The company now forecasts earnings of $2 to $2.05 a share for 2003--a range up slightly from last year but below the Wall Street consensus forecast of $2.13 per share.

And in the wake of a failed product launch that executives discussed Wednesday, last week's departure of two top executives and soft sales that affected earnings, co-Chief Executive Roger Deromedi warned analysts that 2004 would be "another difficult year."

He declined to elaborate, though he blamed the company's problems in part on the weak economy and a thinning inventory at clients who have had their own struggles, such as Kmart Holding Corp. and grocery distributor Fleming Companies Inc.

In the three months ended June 30, Kraft's revenue rose 4.4 percent to $7.84 billion. But sales volume increased by just 1.7 percent, well below Kraft's expectations.

"While costs were generally in line with our forecasts, volume was below our projections due to soft consumption and accelerated trade inventory reductions," Deromedi said.

During Wednesday's after-market conference call, analysts--several of whom are expected to downgrade the stock when trading opens Thursday--questioned everything from the company's business model to its marketing plans.

Co-Chief Executive Betsy Holden said poor sales in cheese, coffee, cold cuts and the Nabisco cookies business were amplified by a major product launch gaffe, a surprise at a company noted for its ability to smoothly introduce new products.

The failed bid to launch Chips Ahoy Warm N' Chewy cookies in the United States cost Kraft about 1 cent per share, forcing the company to absorb an estimated $17 million in unexpected costs.

Cookie sales were generally "soft" during the quarter, according to Holden, because Kraft raised prices to help counter wheat and energy price increases it faced during production. But those moves backfired, as did similar actions in its cheese, Oscar Mayer cold cuts and coffee businesses, where the differential in price between private-label competitors expanded.

Holden said aggressive advertising and promotions would help tackle such problems at Nabisco and in its other high-margin U.S. operations that had struggled.

Starting in September, Kraft will throw $200 million more into the mix to boost advertising spending, which will effectively lower the price of some of its best-known products for limited periods and raise the profile of others.

Kraft shares, which declined by 2 cents to close at $30.80 on the New York Stock Exchange before the report was released, fell more than 7 percent in after-hours trading.

Word of the earnings shortfall came a week after two key executives left the Northfield-based company in a shakeup that analysts said raised concerns about its business trends.

For the first six months of 2003, net income was $1.8 billion, or $1.04 a share, up 13 percent from $1.6 billion, or 92 cents a share, for the same period of 2002. Revenues were $15.2 billion, up 4 percent from $14.7 billion.

As a result of a recent adverse court ruling against Philip Morris USA, which along with the foodmaker is part of the recently renamed Altria Group Inc., Moody's Investors Service lowered its outlook on Kraft earlier Wednesday to negative.

Kraft, which has about $1.5 billion in cash on its books, said it will continue to hold large sums of cash while its access to commercial paper markets is hampered. Kraft is 84 percent-owned by Altria Group.